SPOT MARKET gold prices started the year by touching a two-week high above $1680 per ounce Wednesday morning, as European stock markets also gained following news of a deal in Washington to avoid the so-called fiscal cliff.

Gold in Euros and Sterling by contrast were little changed on the day by late morning in London, recovering losses following a slight dip during Asian trading.

Silver meantime rose to $30.89 an ounce – also a two week high – as other commodities also gained.

On the currency markets, the Dollar fell sharply against the Euro as Asia opened, before recovering some ground later in the day.

The EuroStoxx 50 index, which tracks blue-chip Eurozone stocks, rose to its highest level since August 2011, while prices for US Treasury bonds fell after Congress passed a deal to avoid tax rises and spending cuts that were scheduled to start today.

The House of Representatives passed a bill, agreed a day earlier in the Senate, that will extend tax cuts for all Americans except those in the top 1% of earners – defined as individuals earning more than $400,000 a year and families earning more than $450,000.

“Today’s agreement enshrines a principle into law that the deficit must be reduced in a way that is balanced,” US president Barack Obama said Tuesday.

“Everyone pays their fair share. Everyone does their part.”

The deal is expected to generate $620 billion in tax revenues over ten years, while the value of spending cuts in the deal over that period is $12 billion. The so-called sequester of cuts to military spending and programs such as Medicare was postponed for two months. The sequester, which was due to come into effect today, was agreed in 2011 when Congress last raised the debt ceiling limit on federal borrowing.

“The fiscal cliff was in many ways a self-made deadline to make [politicians] face the hard choices,” says Maya MacGuineas, president of campaign group the Committee for a Responsible Federal Budget.

“They once again managed to duck all of them.”

“The process was so chaotic and the outcome so unsatisfactory,” says a note from Citi fixed-income strategist Steven Englander, “that we are likely to see a further US downgrade at some point.”

“The colossal failure of political will to get America’s fiscal house in order should provide fodder for the gold bugs to bid prices higher,” adds Edward Meir, metals analyst at brokerage INTL FCStone.

“We suspect gold will likely do better over the next few weeks.”

Ratings agency Standard & Poor’s stripped the US of its triple-A rating in August 2011, shortly after the debt ceiling was raised to $16.4 trillion following weeks of political negotiation. The US Treasury said last week that the government has now reached that limit, and is undertaking extraordinary measures aimed at keeping government debt from hitting the limit for another two months.

If the US hits the debt, the government would be forced to “default on its legal obligations”, the Treasury says.

Over in Europe, Germany’s manufacturing sector contracted at a slightly sharper rate in December compared to a month earlier, according to purchasing managers index data published Wednesday.

Contraction also accelerated for the Eurozone as a whole, although UK manufacturing moved back into growth territory, PMI figures indicate.

China’s official manufacturing PMI meantime held steady at 50.6, with a PMI above 50 indicating sector expansion. Similar December data for the US are due to be published later today.

India, traditionally the world’s biggest source of private gold demand, is considering raising the cost of importing bullion, the country’s finance minister P. Chidambaram said Wednesday, adding that he expects the value of gold imports in the current fiscal year to be down 31% at $40 billion.

“This could dent demand for gold further,” said Gnanasekar Thiagarajan, director at Commtrendz Research in Mumbai.

“Because of inflationary fears, the government is not increasing duty on other essential commodities. Since this does not affect the common man, government could be encouraged to increase duty further to curb imports.”

The Indian government twice raised import duties last year, with the authorities citing gold imports as a major contributing factor the India’s trade deficit.

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